Fixed Rate Loans

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What is a Fixed Rate Loan

A Fixed Rate Loan is a loan where the interest rate is guaranteed to remain the same during an initial term (years), regardless of what may occur in the market with variable rates.

Traditionally, lenders have offered terms of between 1 – 5 years for fixed rates, however some Lenders may offer terms of up to 10 years.

Fixed Rate term loans normally require the loan to be renegotiated at the conclusion of the fixed term, thus a five year fixed term loan would normally be required to be repaid in full at the end of year 5. However, most Lenders have the ability to arrange for the facility to revert to the Standard Variable Rate after the Fixed Rate term has expired. Therefore, a loan facility can be established for a 25 or 30 year loan term with the first five years, fixed at a specific interest rate.

Why is Fixed so popular?

Fixed rate loans are popular with borrowers that want to take a conservative approach to borrowing, as they guarantee that the loan repayment will be the same for the Fixed Rate period. Many property investors have also found the Fixed Rate loans attractive products due to the product offering the comfort of guaranteed repayments.

Borrowers who take fixed rate loans need to understand that they are committing to a contract with the lending institution for the fixed rate term, and that should the contract be broken or the term changed, the Lender may charge the borrower substantial fees to cover the costs of breaking the contract.

These “Break Costs” and can be very expensive. The break costs are determined by many factors, such as;

+ The term remaining,
+ The current interest rate environment and
+ The amount of the outstanding balance.

These break costs cannot be estimated when the contract is taken out.

Things To Watch For

In addition to the potentially prohibitive break costs, many Lenders also restrict the amount of extra repayments that can be paid in on the loan during the fixed rate period. Only a few lenders allow unlimited additional repayments without penalty as the majority cap the repayment from $2,000 to $10,000 as additional annual contributions.

The restrictions vary from lender to lender, and if you are thinking of taking a fixed rate loan, these restrictions may be a very important factor to consider.

Can I have Fixed and Variable?

If you like the idea of a fixed rate and are unsure of the rate fluctuations in the current interest rate market you can split your loan into 2 loans. Fix one portion of the loan and have the other portion at a standard variable rate loan to fluctuate with market rates.

For example; if you have a $500,000 loan, you may wish to split your loan into a $300,000 fixed rate loan and the other portion of $200,000 at a variable rate loan.

By fixing the $300,000 loan you know what the repayments will be every week, fortnight or month over the term (years) of the fixed period. The variable portion will fluctuate in the market conditions & if rate rises your repayments are only higher on the variable rate amount of $200,000 and not on the $300,000 which is fixed.

If the reverse happens with rate dropping, then you’re not locked in on a $500,000 loan fixed at a higher rate as you we enjoy and benefits of a split loan.

Fixed rate loans are not for everyone and you will need good financial advice, therefore talk to us before you lock in a fixed rate. Lenders are offering great fixed rate term now. Check out our Lenders Special Rates and Product Offerings page.

Let Neomoney help you with a great fixed rate today.